Managing Prediction Markets with Informed Agents

9/12/19 | 4:15pm | E51-335
Reception to follow.

John Birge

Professor
The University of Chicago

Abstract: Prediction markets can be used to extract the wisdom of the crowd, but an informed participant can manipulate such markets in many cases. This talk will describe how this can occur when participants or the market maker is unaware of informed participants' presence. In the context of spread betting markets, a market maker can however execute a strategy that effectively aggregates information from participants with a small loss in efficiency relative to the best policy without informed agents. The talk will describe how that policy overcomes the informed agents' advantage through the market maker's commitment power. The result partially explains the presence of market makers in spread betting markets and is broadly consistent with empirical observations of markets for the outcomes of National Basketball Association games.

Bio: John R. Birge is the Jerry W. and Carol Lee Levin Distinguished Service Professor of Operations Management at the University of Chicago Booth School of Business. He studies mathematical modeling of systems under uncertainty, especially for maximizing operational and financial goals using the methodologies of stochastic programming and large-scale optimization. In the energy sector, his interest has focused on mechanisms for including uncertainty considerations into electric power unit commitment and capacity investment decisions. He has published widely and is the recipient of the Best Paper Award from the Japan Society for Industrial and Applied Mathematics, the Institute for Operations Research and the Management Sciences Fellows Award, the Institute of Industrial Engineers Medallion Award and was elected to the National Academy of Engineering.

A former dean of the Robert R. McCormick School of Engineering and Applied Sciences at Northwestern University, he has worked as a consultant for a variety of firms including the University of Michigan Hospitals, Deutsche Bank, Allstate Insurance Company, and Morgan Stanley.

Birge earned a bachelor's degree in mathematics from Princeton University in 1977 and a master's degree and a PhD in operations research from Stanford University in 1979 and 1980, respectively.